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Wealth & legacy

Irrevocable life insurance trusts (ILITs) and estate liquidity

Having a trust own your life insurance to control how the money is used and keep it out of your estate.

About a 5-minute read

What it is

An irrevocable life insurance trust is a trust, drafted by an attorney, that owns a life insurance policy and receives the death benefit. Because you don't own the policy, the proceeds generally aren't included in your taxable estate when the trust is set up and funded correctly. The trustee then distributes the money according to the trust's rules.

Who it's often for

  • Families who want control over how and when heirs receive money, for example children who are young or not ready to manage a large sum.
  • Families who want to protect an inheritance from an heir's creditors or divorce.
  • Families who need cash at death to cover costs without selling a business or property.
  • Families whose estate is large enough that estate tax is a concern.

How it works

Scene 1

The flow at a glance

While you're living

At death

While you're living, you give the trust money each year and the trustee pays the premiums to the insurance company. At your death, the benefit goes to the trust, and the trustee passes it to heirs on the trust's terms or provides cash to the estate.
  1. 1Your attorney drafts the trust and a trustee is named.
  2. 2The trust applies for and owns a new policy (or an existing policy is transferred to it).
  3. 3You give the trust money each year to pay the premiums. Beneficiaries are often given a short window to withdraw these gifts (called Crummey notices), which helps the gifts qualify for the annual gift tax exclusion. The trustee must send these notices properly.
  4. 4At your death, the trust receives the benefit and the trustee manages or distributes it per the trust's terms, and can provide cash to the estate by buying assets or making loans, as the trust allows.

What to watch out for

  • Irrevocable means you generally can't change the trust or take the policy back.
  • If you transfer an existing policy to a trust and die within three years, the proceeds may still be included in your estate; having the trust buy a new policy avoids this.
  • Crummey notices and trust administration must be done correctly every year.
  • There are legal and administrative costs, and the trust may need its own tax filings.
  • The trustee's role matters; choose carefully.

Questions to ask before moving forward

  • What do we want the trust to accomplish, beyond taxes?
  • Who will serve as trustee?
  • New policy or transfer of an existing one?
  • How will premiums be funded each year?
  • Who handles the annual notices?

Who else should be involved

An estate planning attorney (required to draft the trust), your CPA, and the trustee.

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Advanced concepts are described in general, simplified terms for education only. They involve legal, tax and financial considerations that depend on your situation and on current law, which can change. IAM Money Management does not provide tax or legal advice; consult your attorney and tax professional before implementing any strategy. Life insurance and annuity products are issued by insurance carriers, and features, costs and guarantees vary by carrier, product and state. Guarantees are backed by the claims-paying ability of the issuing carrier.